Lawmakers Seek Guidance on Using Tax-Exempts to Refinance Student Loans

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WASHINGTON – Bipartisan groups of House and Senate lawmakers are urging the Treasury Department and Internal Revenue Service to ease barriers that prevent nonprofit lenders from using tax-exempt bonds to refinance student loans.

"Expanding the ability of nonprofit lenders to refinance student loans will result in more options and a better deal for more Americans working to pay down their student debt," Sen. Chuck Grassley, R-Iowa, and other legislators told Treasury Secretary Jack Lew and IRS Commissioner John Koskinen.

Student loans are the second biggest source of personal debt in the U.S. and about 90% of these loans are issued by the federal government, said separate but identical letters, which were also signed by Sen. Jack Reed, D-R.I., as well as Reps. Todd Young, R-Ind., and John Larson, D-Conn., and 16 other members of Congress.

The lawmakers said they appreciated guidance (Notice 2015-78) the Treasury and IRS issued last year clarifying that state student loan programs can issue tax-exempt bonds to fund parent loans for students and that tax-exempts can be used for a broad range of refinancings that help student loan borrowers take advantage of lower rates.

But several technical issues remain that may inhibit state and nonprofit organizations from fully implementing refinancing programs, they said.

The lawmakers want Treasury and the IRS to issue or clarify guidance on three specific issues.

They asked the agencies to clarify that tax-exempt bonds used to refinance an original student loan financed with tax-exempt bonds will not be considered refunding bonds.

They also asked for guidance that issuers can rely on to help them determine that original student loans met loan size limitations required for tax-exempt financing.

Finally, they asked for guidance that makes clear a former student can refinance an original loan that was a parent loan and vice versa. Related to this, they also asked for clarification regarding the student nexus as it relates to a parent refinance loan.

"Current guidance helpfully recognizes that students may change their state of residence from the [one] or school attendance at the time of the original loan," the letter said. "The same recognition should apply to parent borrowers, who are equally mobile."

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